The automotive sector is very important to the Canadian economy, directly employing over 700,000 workers. It contributes billions annually in revenue and trade. However, the Canadian automotive industry faces challenges in securing future investments as costs rise and global competition increases. The recent UAW agreements in the US may threaten Canadian and Mexican plants by prioritizing US jobs and investments going forward. Canada needs to improve its competitiveness, especially in the automotive supply sector, to have the best chance at securing future investments from automakers.

1. Strategic Review of the Canadian Automotive Industry Dennis DesRosiers - February 28, 2007

2. The automotive sector is Canada ’ s largest direct employer and one of Canada ’ s largest trading sectors Over 700,000 workers directly employed by the sector Millions of other jobs indirectly affected by the sector About 40,000 firms directly involved with manufacturing, distributing, selling and repairing vehicles All Provinces have some exposure but most Manufacturing is in Ontario with a smattering in Quebec Importance of the Auto Sector to the Canadian Economy

3. One in seven jobs in Canada are tied directly or indirectly to the automotive sector, one in six in Ontario, one in five in Automotive communities like Windsor, Cambridge, Oshawa Many other sectors have a very high dependence on the automotive sector Petroleum Industry Banks Insurance Raw Materials Ports/Shipping A truly national industry with thousands of jobs in every province directly tied to the automotive sector Importance of the Auto Sector to the Canadian Economy

4. Motor vehicles are ingrained into our lifestyles 80%+ Canadians drive to work Cities-Suburbs are built around access to personal use transportation Commerce – “ Find someone who hasn ’ t used a Tim Horton ’ s or McDonalds drive through ” Emergency Vehicles Entertainment The Automotive Industry is NOT going away, it is really a case of what vehicles will be required and where these vehicles will be built and the mobility of jobs in the manufacturing side of the sector Importance of the Auto Sector to the Canadian Economy

5. Final Retail = $156 Billion in Revenue including Financing Automotive Finance Parts and Service Used Vehicles New Vehicles $38 B Loan $29 B $17 B $53 B Four Windows” to Automotive - 2007 $20 B Lease

6. Raw Material MTDM Parts Manufacturing Vehicle Assembly Vehicle Distribution Vehicle Retailing Vehicle Trade Ins Wholesale Trade / Auction Asset Acquisition Retailing Credit Adjudication Funding Admin Collection Asset Disposal Parts Manufacturing Warehouse Distribution Wholesaling Installation / DIY Parts Return / Disposal New Vehicles Used Vehicles Vehicle Finance Aftermarket Vehicle Retailing The Auto Sector by Function Manufacturing Focus in Red Distribution Focus in Blue Retail Focus in Yellow

7. The manufacturing side of the sector is the most sensitive politically in that most of these jobs are relatively mobile and increasingly can be located in any number of countries Distribution and Retail is relatively job neutral … if one dealer fails another somewhere else benefits but both are in Canada so it is neutral and usually not politically sensitive. The Auto Sector by Function

8. Raw Material MTDM Parts Manufacturing Vehicle Assembly Vehicle Distribution Vehicle Retailing Vehicle Trade Ins Wholesale Trade / Auction Asset Acquisition Retailing Credit Adjudication Funding Admin Collection Asset Disposal Parts Manufacturing Warehouse Distribution Wholesaling Installation / DIY Parts Return / Disposal New Vehicles Used Vehicles Vehicle Finance Aftermarket Vehicle Retailing Global Focus in Red North American Focus in Blue Canadian Focus in Yellow The Auto Sector by Geography

9. The vehicle assembly sector has become very global and will become even more global thus Canadian plants have to compete within a global framework. What realistically can Canada do to counter global issues? Can Canada resist the globalization of the auto sector and the answer simply is … . NO! (ie: the Korea issue) The OE Parts sector in still very North American but is becoming more global but at a very slow pace, aftermarket parts is much more global than OE Parts. So our OE parts competition is really the US and Mexico. (Mexico is significantly out-performing Canada in the N.A. parts sector) All things considered the volume of OE parts coming into North America from overseas is still quite small … growing rapidly but from a very small base and is more aftermarket focused than OE focused (this is changing as well though) The Auto Sector by Geography

10. The Structure of our Market in Canada

11. Source: DesRosiers Automotive Consultants Inc. New & Used Vehicle Sales in Canada – 000’s of Units

12. The Canada/U.S. border is open to trade in the used vehicle market so Canadian consumers have access to the extremely large U.S. market representing some 248 million vehicles. Price increases or restrictions in what consumers can purchase in the Canadian new vehicle market will lead to an increase in imported used vehicles and these are likely less fuel efficient. Indeed, upwards of 200 thousand used vehicles will come to Canada in 2008 and almost of all them will be larger and less fuel efficient products. There are few tools to stop these used vehicles from entering Canada and aggressive social policy initiatives could convert Canada to simply becoming a large used vehicle market … and there is precedent for this in some global markets Market Structure

13. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA Canadian Light Vehicle Market 2000 - 2007 The Canadian market is moving away from Mid-Sized Family Vehicles and instead is becoming primarily a market for small entry level vehicles …. Large/luxury is growing driven by demographic issues … the commercial use market is very stable and will remain so.

14. Retail Units (Thousands) Fleet Units (Thousands) Fleet Consumer Fleet vs. Retail 1990 – 2007 Calendar Year Canadian Light Vehicle Sales 1990 – 2007

15. Consumers are moving away from Mid-Sized Family Vehicles as well as light truck for personal use Vehicle Consumers Purchase

16. Fleets also moving away from the mid size/family market with a distinct move up-scale. Vehicle Fleets Purchase

17. Entry Level Market Share vs. Gas Prices - Jan. 2004 – Jan. 2008 Source: MJ Ervin & Associates, DesRosiers Automotive Consultants Inc. Gas Prices (cents) Entry Level Market Share

18. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA Entry Level Vehicles 2000 - 2007

19. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA Mid-Size/Family Vehicles 2000 - 2007

20. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA Large/Luxury/Sports Vehicles 2000 - 2007

21. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA Commercial Use Light Vehicles 2000 - 2007

22. Source: DesRosiers Automotive Consultants Inc., AIAMC and CVMA All Vehicles 2000 - 2007

23. The Fundamental Issue in the Automotive Sector across North America !!!

24. Vehicles N.A. Consumers Buy – Market Share Detroit based OEM’s vs. Global OEM’s

25. Vehicles N.A. Fleets Buy – Market Share Detroit based OEM’s vs Global OEM’s

26. Critical to Market Share changes are: Product, product, product Competitiveness of each OEM (ie: pricing factors) Speed to market Distribution Efficiency Excellence at the Retail Level With the exception of competitiveness issues there is very little Governments can do to help the OEMs with any of these issues!!

27. GM, Ford and Chrysler are going through a three step process to address their issue of lost market share First is to re-size their organizations which is largely completed … and up to this point they have been “Canada Light” in this re-sizing exercise in that Canada has generally taken less downside than in the U.S. Second is to re-structure and to address the cost structures within their organizations with the biggest task being the reworking of their labour contracts ….UAW is done … CAW is this fall Third is to re-invest in new products and new plants which is in the early stages … this is where Canada has the most upside opportunity but also where Canada is the most vulnerable!

28. GM, Ford and Chrysler market share losses have translated into significant reductions in their light vehicle production and any entity touching them has had a negative adjustment to make starting with themselves New Domestic investments have resulted in significant increases in their N.A. production and overseas suppliers who have come to North America have significantly benefited .. There is actually a surprisingly small increase in overseas sourced components

29. North American Production of Vehicles # of Units 4 million units fewer Detroit based vehicles produced has resulted in huge downsizing at any entity touching these companies … suppliers, tool and die, dealers, raw material etc … and the OEMs themselves

30. North American Production of Vehicles # of Units There does not appear much downsizing left out of Detroit .. The upside for Canada is to get another one or two assembly plants from the new domestics

31. The North American Auto Parts Sector is also in the midst of a mass Global “localization” of the supply base, not necessarily a “globalization” of the supply base as overseas suppliers move into North American The level of competition from on-shore has never been greater and will get more intense. Dozens of suppliers have moved into North America and more will come to North America so there is opportunity to grow this aspect of our auto sector

32. N.A. Original Equipment and Aftermarket Parts Market There are very few components coming into North America from overseas, most of the activity is overseas suppliers building plants in North America

33. Canada has traditionally been very successful within the North American automotive assembly sector. We are actually operating from a relatively strong position. Although there are serious issues emerging that threaten our current success.

34. Canadian Production

35. North American Vehicle Production 2000 – 2007

36. But Canada is operating from a relatively weak position in its automotive supply base and most signs point to this sector deteriorating

37. Employment in Canadian Automotive and MTDM Sectors

38. Canada’s Share of the US Market for Automotive Parts

39. Canada’s Share of the US Market for Automotive Parts

40. New Capital Expenditures in Canada and the US - $CDN Millions

41. Why has Canada been successful in some areas of the automotive sector?

42. NAFTA guarantees access to North American market Duty-free access to Canada/US/Mexico markets with NAFTA free trade agreement Few non-tariff barriers (e.g. 62.5% NA content requirement)

43. Our Governments have been responsive and responsible on many levels Creating a positive fiscal environment Human Resource policies .. training, education etc A “ fair ” regulatory environment An understanding of the industry and its issues A willingness to work with the industry through CAPC type initiatives

44. Canada has always viewed Import OEM manufacturers as valued partners Unlike some US States like Michigan, Canada has not been aggressively negative towards global players and has not been threatening these global players with protectionist measures etc. (Korea Free Trade issue today!) Historically, Canada ’ s assembly sector has been 100% foreign owned, therefore we value foreign investment

45. Japanese (parts and assembly) and European investors (parts) extremely successful with Canadian operations so there is a high and positive demonstration effect Toyota ’ s most successful plant outside of Japan is in Canada which resulted in a new second new assembly plant for Canada, currently under construction Toyota ’ s only Lexus plant outside of Japan is in Canada Honda Canada ’ s two assembly plants are launch pads for new product introductions … Pilot, Odyssey, Ridgeline, etc … Honda adding engine capacity into Canada 100+ Japanese and European OE parts suppliers and growing

46. Canada is slowly becoming a global centre for intellectual capital Canada is becoming, albeit slowly, a centre for research, design, development, and testing of vehicles Over $1.5 billion in intellectual capital invested in Canada over the last 5 years although very little from the off-shore players, almost all from GM, Ford and Chrysler and a smattering from suppliers … but still a very small percentage of the estimated $100 billion in intellectual facilities in North America This is actually the fastest growing aspect of the Canadian automotive sector but this growth is not strong enough to off-set declines in other areas.

47. All OEM ’ s have completely renewed their investments in their Canadian facilities GM, Ford and Chrysler all have re-committed to Canada Toyota is doubling capacity (will have 2 plants) Honda is adding engine capacity to their existing two plants The only assembly plant “ on the bubble ” is the Ford plant in St. Thomas So Canada is NOT threatened on this round of investments, the real issue will be the next round of investments.

48. Our Governments (especially Ontario) have also traditionally been very pro-active with policies and initiatives that benefit the sector, the industry did not get to its positive position solely through the free market The 1965 Auto Pact Duty Remission Programs Selected Duty reduction initiatives Voluntary Export Restraints (VER ’ s) Loan support for Chrysler in 1980 ’ s Targeted incentive programs especially for tooling and expansion PAC, OCAPT type initiatives Overseas Investment promotion, trade missions etc EDC , BDC programs Significant Incentives to help GM, Ford and Chrysler through their current restructurings Selected use of tax policy (ie: S & T write offs, changing the capital tax structure, etc)

49. Absolutely every single assembly plant investment in Canada has had a strong and often heavy hand involved at the Federal or Provincial level … usually behind the scenes but often very publicly Canada has largely secured this round of assembly investments .. It is the NEXT round of assembly investments that are vulnerable. For the first time in the modern history of the automotive sector Canada will have to secure investments almost solely on our competitive position relative to the U.S.A. and Mexico Most in the industry indicate that this will be difficult to accomplish and labour thinks it is impossible … others believe it is more a crisis in confidence rather than some inherent inability to compete for investments

50. Issues of Concern

51. Issues of Concern The Resizing, Restructuring and Reinvestments at GM, Ford and Chrysler The UAW Negotiations Supplying the Japanese OE’s in North America? Weaknesses in Canada’s supply base Addressing social policy agenda items

52. The impact of GM, Chrysler and Ford’s restructuring on Canada? What happens to the suppliers, communities and workers affected? This is the Windsor Issue which is the community the most affected! Will the OEMs continue to be Canada “light” or will Canada bear a “heavier” burden in the future How does Canada improve its position to secure the next round of investments Canada is highly reliant on the success of specific models? Can we improve our chances? GM, Ford and Chrysler’s Restructuring

53. The UAW Negotiations Truly transformational. Brings a fundamental change to the cost structure of GM, Chrysler and Ford in the U.S.A. Eliminates up to $25.00 per hour of cost and brings cost structure in line with new domestics VEBA for health care and two tier wages a large part of the savings But, some aggressive job guarantees and other language that could force investments into U.S. facilities to accommodate In addition, outsourcing of components will be very difficult in the future and indeed we could see in-sourcing of components if market share losses continue (this is the easiest route to cover job guarantees)

54. The UAW Negotiations UAW finally understands that the future of GM, Ford and Chrysler resides in successful product programs so the they aggressively lobbied for and got product commitments for US based plants This threatens Canada and Mexico in the medium to long term (not the short term) but securing all future product mandates just got a lot harder for ALL plants The CAW would appear to have no choice but to play this game since Canada is now one of the highest cost auto assembly locations anywhere in the world Which Buzz emerges … Buzz the smart labour negotiator or Buzz the bombastic politician?

55. The UAW Negotiations The CAW would appear to have no choice but to play the cost cutting game since Canada is now one of the highest cost auto assembly locations anywhere in the world Union shops in Canada and suppliers will have to “mimic” these labour Agreements over the next few years and also lower their cost structure. But Canada does not have $25/hour in savings available without threatening base wages. Trying to cut base wages (likely need $8 to 10.00 per hour) would be war!!. Which Buzz emerges … Buzz the smart labour negotiator or Buzz the bombastic politician?

56. The UAW Negotiations Now the ball is in GM, Ford and Chrysler’s court, no more excuses Their ability to stop their market share erosion, if not increase market share, is now the critical question and the ONLY way to stop market share erosion is Product, Product, Product ….. we therefore expect all time record investments in new products top to bottom through these companies which will benefit suppliers, the tool sector etc and possibly Canada if Canada plays this right Add to this an unprecedented expenditure by all OEMs to meet the U.S. 35 miles per gallon climate change standard and there appears to be a significant opportunity for Canada to improve its position within the North American automotive sector

57. Supplying the Japanese in N.A. No doubt that this is proving to be difficult for many N.A. suppliers but the Japanese are NOT bringing in components from the home market (imports are actually down not up) instead they are bringing their best suppliers to North America (opportunity for Canada) The roots of any OEMs strength is its supply base and it is very difficult to break into these relationships. The best of the best North American suppliers are making in-roads with the Japanese it is just that Canada has very few really good suppliers Most successful route is levering off a joint venture opportunity, but JV partners are difficult to find UNLESS you truly have world class technology and/or production processes or are willing to invest in same and again this plays to Canada’s weakness.

58. Weakness in Canada’s Supply Base You don’t have to take your shoes off to count the number of highly capable Canadian owned suppliers … We are fortunate to have attracted a number of very capable overseas suppliers but a lot more work has to be done here. This whole supply sector issue is currently the biggest downside for Canada from a jobs and production point of view

59. The Big Picture Social Policy Agenda issues facing the industry (The environment, fuel efficiency, safety, grid lock etc) currently appear to be more of a downside threat to Canada’s manufacturing base than an upside opportunity Canada is not well positioned to take advantage of the ‘greening’ of the automotive sector since most of our production base is focused on larger less fuel efficient products a hold over from our Auto Pact days which encouraged the OEMs to build larger vehicles in Canada … we benefited from this for years … now it is hurting Canada Social Policy Agenda Items

60. Need to set the Rules of Engagement for Government Policy What is the role of Government Policy? Can the Gov’t play in this sector, if so how, how aggressively, where etc.

61. Absolute neutrality between corporate players since nobody can predict who the winners and losers are going to be! A global approach to development since the industry itself is becoming very global A focus on promoting efficiency where-ever possible since only the lowest cost jurisdictions will thrive Investment promotion to get latest technologies for Canada Infrastructure development Taxation and regulation Human Resource Policy Rules of Engagement for Government Policy

62. Extreme Caution on approach to social policy agenda items since they put Canada into a very negative light in a global race for investment … Canada can’t go off on its own agenda since our market is a fly speck in the global automotive arena! No amount of positive industrial policy initiatives are enough to offset even the smallest policy mistake on these social policy agenda items. (The Federal Feebates, the Ontario EFFI tax, the BC luxury tax are all sore points for OEMs in Canada) And these social policy initiatives are increasingly becoming visible in corporate board rooms and are problematic on the investment front. Rules of Engagement for Government Policy

63. Wages and jobs are increasingly being linked to skill/intellectual capability N.A. Automotive sector annually spends about $30-35 Billion in Research, Design, Development and Testing of Vehicles and Parts and Canada gets very little of this so there appears to be an up-side opportunity and available $$ ’ s. In essence there are four possible scenarios for Canada Low wage – Low skill (currently China, Korea … ) Low wage – High skill (currently India … ) High wage – Low skill (Historically in Canada, U.S.) High wage – High skill (The Future for Canada, U.S.???) The Future of the Canadian Automotive Sector is the “ Six Inches Between our Ears ”

64. Governments at all levels in Canada need to use policy tools available to them to help the Canadian automotive sector embrace higher skills and to move up the intellectual curve. The other options are not palatable to most in the sector

65. Conclusions The Automotive Sector remains Canada’s most important industry and across all value chains employ’s over 700,000 Canadians But many aspects of the Automotive Sector have Globalized and this has resulted in a major restructuring of the sector across North America … Canada is not immune from this trend. Fierce competitive environment is fostering innovation with billions being invested in Technology and the ‘Green’ agenda will trigger even more innovation The Canadian Auto Sector is well positioned to survive the industry’s current re-structuring …. The degree of Government help required is uncertain but there likely is a need for some sort of ‘action plan’ Focusing on innovation and efficiency is key to any success

66. Questions? Dennis DesRosiers DesRosiers Automotive Consultants Inc. 80 Fulton Way, Suite 101 Richmond Hill, Ontario t: 905.881.0400 f: 905.881.7456 e: dennis@desrosiers.ca www.desrosiers.ca